What is a Black Box Trading System?

What is a Black Box Trading System?


So what exactly does  a black box, aka a computer based system actually look like?

The 50,000 foot view would show an everyday computer. The same type of “machine” you would buy online or at a retail outlet. There is no need for anything beyond what is available to all consumers. Your machine “houses” the black box. Though use of the word “black box” implies we have no idea what actually happens inside. We in fact do.

Imagine sitting in front of your machine and envision a stream of data, from the market, entering on the left side. Now imagine buy and sell orders, generated by your machine, exiting from the right side.

It’s essentially that. At least that is how the schematic would look from a distance. A simplified version if you will.

Now let’s look closer at the machine itself. Your computer performs all the calculations. While a basic internet connection, whether hard wired or wireless performs the communication of data in and orders out. No need for microwave technology. As an example, our systems are 1,000 miles away from the “exchange” and using a basic internet connection it takes less than 200 milliseconds (.200 seconds) to travel this entire loop.

So let’s dig deeper into the mysterious “black box.” The first layer you peel will expose a trading environment. A third party software application such as MultiCharts, TradeStation or NinjaTrader. Using simple “plug and play technology” these programs enable you to “connect” with ease, to the exchange for both data and market access.

One layer deeper is where the black box earns its dubious nickname. Within each “trading environment” as discussed above, these programs, using a language unique to them, house the black box. This is where the developer “writes” their code. Their algorithm.

Remember, an algorithm, though fancy in name is simply a set of rules to buy and sell securities. If the 10MA crosses above the 20MA, buy 1 share of stock XYZ. That is an algorithm. Nothing too complex there. Though most algorithms have more than one simple conditional statement, the less is more approach is often the best strategy.

So now let’s step back again, maybe to 5,000 feet so we can still see some detail. What you see is a machine. Where a simple internet connection transmits price from the exchange to your machine. Trading ES? Then you are connected to Chicago and your home office via the internet for example.

Once that “tick” or last recorded price arrives at your machine, the trading environment or the software on your machine, takes the data and performs a calculation using the “code” you wrote. If a signal to buy or sell is generated, then once again, the trusty old internet takes that signal, and within an extremely short period of time sends it to the exchange and fulfills your trade request.

That’s it. I may have simplified things a bit for the sake of this discussion, but I really didn’t overlook anything. The real key comes down to understanding the language specific to the trading environment, allowing you to create your own “black box.”


This article was sponsored by Advanced Futures

Headquartered in Chicago, Advanced Futures was founded in 2002, by traders and investors with an extensive history in the industry.

Our experience includes brokerage and clearing services, systematic development and programming, trading all asset classes as independent traders and with prop firms, career placement and capital matching.

We help traders and investors build and grow computer based systems through education, placement and consulting.